International Financial Management

Abridged 10th Edition

by Jeff Madura

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 20
Short-Term Financing

Chapter Objectives
This chapter will:

A. Identify sources of short-term financing for MNCs

B. Explain how MNCs determine whether to use foreign financing

C. Illustrate the possible benefits of financing with a portfolio of

currencies

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 Sources of Foreign Financing

1. Internal short-term financing

a. An MNC should have an internal system that consistently
monitors the amount of short-term financing by all
subsidiaries.
2. External short-term financing
a. Short-term notes
b. Commercial paper
c. Bank loans
3. Access to funding during the credit crisis
a. MNCs had limited access to short-term funding.

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Financing With a Foreign Currency

1. MNCs borrow the currency that matches future cash

inflows
a. If they have a net receivables position in foreign currency,
they may borrow in that currency to hedge their receivables

2. Comparison of interest rates among currencies

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 Exhibit 20.1 Comparison of Interest Rates
among Countries (as of January 2009)

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 Criteria Considered in the Financing
Decision
1. Interest Rate Parity: if interest rate parity exists, the
currency will exhibit a forward premium that offsets
the differential between its interest rate and the home
interest rate.
2. The Forward Rate as a Forecast: If the forward rate
is an unbiased predictor of the future spot rate, then
the effective financing rate of a foreign currency will
on average be equal to the domestic financing rate.
3. Exchange Rate Forecasts: the firm can use exchange
rate forecast in conjunction with foreign interest rate
to forecast the effective financing rate.

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Financing with a Portfolio of Currencies
1. Financing with a Portfolio of Currencies
a. Variance (risk) may be higher
b. If low interest rates prevail, probability of lower financing
costs are possible
2. Portfolio Diversification Effects
a. With diversification of currencies, lower financing costs
are possible but currencies used must not be highly
correlated
3. Repeated Financing with a Currency Portfolio
a. Solving the variance of a portfolio’s effective financing
rate becomes more complex as more currencies are added
b. Computer software packages are used to solve for the
effect
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.